Price And Value
Price is what you pay, value is what you get. – Warren Buffett
“Nowadays people know the price of everything and the value of nothing.” – Oscar WildeSeth Klarman’s 2021 Letter: Baupost’s “Never-Ending” Hunt For Information
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
Price and value are two different thing and for you visual folks out there there’s a drawing at the bottom. As you probably already know by looking at your portfolio, the price of a stock mysteriously jumps up and down even where they are no news. A company that I follow, NAPEC (NPC.to) has seen its stock price go from $1.15 to $0.67 and back to $1.25 without any meaningful news. Has its earnings moved that much? No. Did the company had major setbacks? Nope. Did cash disappear and came back? No. Just investors/traders moving in and out of the market. The stock you bought at $0.67 is the same company you are buying at $1.25. During that time period, the intrinsic value of NAPEC didn’t change that much, in fact it actually improved. Business at NAPEC is steady and getting better. But a chart of its stock price will give you motion sickness. It’s sounds crazy and yet its reality. The reality is that prices swing far above and far below what would have been a reasonable assessment of the intrinsic value of a business. I read a stat somewhere that the average stock price moves 80% from its 52-weeks high and low range. Do you really think its cash flow fluctuate near the same degree as its stock price? Of course not.
Some people claim that the stock market is efficient and thus, a company’s price and value are the same (they teach you that in school). From my experience, price and value are two distinct measure and they diverge wildly. While the intrinsic value of a business is admittedly a somewhat imprecise estimate that depends on assumptions, it nevertheless stays within a much narrower range than the common stock price investors are asked to pay on any given day.